Reform of the UK listing, prospectus and secondary fundraising regimes is gathering pace, with the UK Financial Conduct Authority (FCA) engaging with stakeholders on its rulebook proposals and HM Treasury's publication of a near-final version of the Public Offers and Admissions to Trading Regulations. In this briefing, we take stock of the wider package of reforms which are aimed at making London a more attractive and trusted place to list and at striking a balance between achieving transparency and market integrity, whilst removing some of the complexities and key frictions that are often seen as too burdensome. We look at the changes that have already been made as well as others that are yet to come.
Although the changes represent a decoupling from the EU
legislation on which the UK's regimes have been based, it
should be noted that the EU has also published its own, parallel,
package of proposals to simplify its listing and prospectus rules
please see below for further details).
1 Main Market listing regime
On 3 May 2023, the FCA published its Primary Markets Effectiveness Review, setting out its proposals for reform of the listing regime and feedback on its discussion paper published nearly a year earlier (please see our earlier client note for details). As expected from the discussion paper, the proposed way forward is a single segment listing for equity shares in commercial companies ("ESCC"), which will mark the end of our current two-tier listing regime comprising premium and standard listings. The revised proposals no longer include a split between mandatory and supplementary continuing obligations; instead, there will be one set of continuing obligations for all companies in the ESCC category.
The consultation closes on 28 June 2023. No detailed timetable is given, but the FCA intends to consult further on the detail of the proposed rule changes in the autumn and is "aiming for an accelerated timetable, with substantial progress by the end of 2023".
What is changing?
In essence, the regime will be more disclosure-based and less rule-based. Key changes from the current regime are set out below and are summarised in the FCA's table.
- No track record or clean working capital requirements – In a move to eliminate the "quality" differential between issuers, the long-standing requirements for a three-year track record, historical financial statements and a "clean" or unqualified working capital statement will not be included in the eligibility criteria for companies on ESCC. Instead, the FCA proposes a disclosure-based regime which would allow investors to decide whether or not to invest based on the disclosures in a company's prospectus. The FCA assumes that requirements for financial information contained in the prospectus, including specific provisions for issuers with complex financial histories and requirements for working capital statements, will remain.
- Modified rules on independent business and operational control – The rules requiring a company to have an independent business and operational control over its main activities will be modified both at the eligibility stage and as regards continuing obligations. The change signifies that the FCA is open to diverse business models and complex corporate structures. As a result of this and the above changes, existing exemptions for specialist companies, such as mineral companies, will be removed as the "concessions" will no longer be necessary given the modified starting point.
- More flexible approach to dual class share structures
(DCSS) – The FCA suggests a more permissive approach
to dual class share structures, with the following key
- enhanced voting rights exercisable on all matters and at all times (except for the issue of new shares at a discount greater than 10%);
- extended sunset period of 10 years after which enhanced voting rights would cease to be exercisable;
- restrictions on transfer – shares with enhanced voting rights will automatically convert to ordinary listed shares upon the holder ceasing to be a director; and
- no specified voting ration or weighting limits.
- Controlling shareholders – The current requirement for a controlling shareholder agreement will be reframed as a "comply or explain" approach. Listed companies will have to either (i) conclude a shareholder agreement with a controlling shareholder; or (ii) make specific disclosures and include risk factors in its prospectus and annual report. An announcement will be required where a controlling shareholder agreement is altered post-listing.
- Removal of compulsory shareholder votes and circular
for significant transactions and changes to class
- Shareholder approval and a circular will not be required except in the case of a reverse takeover.
- The requirement to make an announcement when a transaction is entered into will be triggered at the Class 1 threshold of 25% (rather than the Class 2 threshold of 5% as is currently the case), subject to a company's obligations under the UK Market Abuse Regulation.
- The FCA proposes removing the "profits test" which often produces anomalous results.
- Sponsors will have more discretion to apply appropriate modifications to the class tests.
- There may be additional requirements for transactions by companies in financial difficulties.
- Removal of compulsory shareholder vote for related party transactions – There will no longer be a requirement for a shareholder vote to approve a related party transaction (RPT). Instead, all transactions meeting the 5% threshold on the class tests will need to be announced, and the announcement must contain certain prescribed details, such as full particulars of the RPT and a fair and reasonableness statement.
- Listing Principles – There will be one set of Listing Principles applying to all companies who list on the ESCC.
What is being retained?
- Sponsor regime – A modified version of the regime will be retained for all companies in the ESCC category. The FCA acknowledges that sponsor due diligence on IPOs will be more extensive given the new eligibility requirements for ESCC, whereas the role of a sponsor post-listing is likely to be reduced.
- Market capitalisation and free float requirements – The requirements for a minimum market capitalisation of £30m and a "free float" requirement of at least 10% of the company's issued share capital, which currently apply to both premium and standard listed companies, will be retained.
- Rules on pre-emption rights and buybacks – The existing Listing Rules that control the discount at which further shares can be offered when they are not issued on a pre-emptive basis will be extended to all listed companies. The rules relating to share buy-backs will also be retained.
- Shareholder approval for cancellation of listing – The rules protecting shareholders from the cancellation of a listing in the absence of a takeover offer or approval by 75% of shareholders will remain.
- UK Corporate Governance Code – The existing Listing Rules for premium listed companies relating to the Code will be extended to all ESCC companies. The FRC has published a consultation on the first revision of the Code since 2018. For further details, please see our client note.
Truly single segment?
Despite the emphasis on a "single segment", the FCA plans to introduce a new separate listing category for SPACs and cash shells. Whilst acknowledging the risk that this category may be perceived as a "re-branded standard listed segment", it states that delineation between the categories will be clear and monitored.
The FCA also envisages that there will be a need for an "other shares" category for existing standard listed issuers which are not eligible to transfer to ESCC, and would include non-equity shares such as preference shares and deferred shares that are currently eligible to list under the standard listed shares category. The FCA is also considering making this open to overseas issuers with a current standard listing.
The FCA expects the remaining categories will remain largely the same (for example, debt securities and securitised derivatives).
By abandoning the split between mandatory and supplementary continuing obligations set out in its previous discussion paper, the FCA's current proposals go much further towards creating a true single segment listing regime that benefits from increased flexibility and simplicity, while also retaining certain key elements of the current regime. The proposed regime appears much more inclusive, yet raises questions as to status and eligibility for the FTSE indices. Firstly, for some issuers who value the current "badge" of quality of a premium-listing, the lack of differential may be a drawback. Secondly, only premium-listed shares are currently eligible for inclusion in the FTSE UK Index Series and it remains to be seen how FTSE Russell will amend its requirements in light of the proposed new regime.
The FCA expects that for existing premium listed commercial companies issuers, a transfer to ESCC would be straightforward, but emphasises that there will be a transitional period to allow companies to adjust. There will be further considerations for standard listed issuers.
Impact of changes
On balance, the FCA feels that the benefits of wider access for companies and expanded investor opportunities outweigh the removal of the current protections as outlined above. However, it does acknowledge the potential impact on some investors and on issuers and their shareholders, including the following:
- The removal of the requirement to seek shareholder approval for certain transactions may reduce retail investors' ability to have a say on such matters. Instead, such investors will need to understand any specific rights attaching to shares and any rights based on relevant company or corporate law.
- The proposed approach places a greater onus on investors to carry out due diligence on companies before investing and on shareholders to secure sufficient engagement with companies on key transactions, particularly as ESCC will potentially include more diverse types of businesses.
- There will be more onus on companies and shareholders to engage effectively on transactions without FCA intervention.
Companies with securities traded on AIM will not be directly
affected by these changes. However, the changes are likely to have
an impact on AIM which has historically presented the advantage of
being less onerous than a main market listing, for example by not
requiring a shareholder vote on significant transactions and
related party transactions. The proposed changes will remove some
of these perceived benefits, which could mean a more uncertain
future for AIM.
2 UK prospectus regime
In March 2022, the Government published the outcome of the UK Prospectus Regime Review (please see our client note for further details), and this was followed at the end of last year by an Illustrative Statutory Instrument: the Financial Services and Market Act 2000 (Public Offers and Admission to Trading) Regulations 2023 (the regulations). In July 2023 HM Treasury published a near-final draft of the Regulations The Regulations illustrate how the Government will make its proposed changes to the existing regimes using powers set out in the Financial Services and Markets Act 2023 and is accompanied by a Policy Note which provides further details of the proposed reforms.
As with the listing regime, the new prospectus framework represents a significant change to the current regime. The key features of the new regime are set out below.
- Admission to trading – In contrast to
the current regime, there would be no automatic requirement to
publish a prospectus when securities are admitted to trading on a
UK regulated market. A key concept of the new UK regime is that the
FCA would have the power to decide whether a prospectus is needed
in the case of admission to trading both on a regulated market,
such as the LSE's main market, and on a primary multilateral
trading facility, such as AIM. This power extends to situations
where there is an offer to the public (see below) alongside the
admission to trading. How the FCA exercises this power will be the
key factor in determining how the new regime will work. For
example, we await details of possible derogations in relation to
areas such as smaller and frequent secondary fundraisings on these
markets and emergency fundraisings. It will also be interesting to
see how the FCA's powers will work in the context of regulating
admissions to AIM. Rather than regulating this directly, the rules
contemplate the FCA requiring the London Stock Exchange (in the
case of AIM) to include certain provisions in its securities
exchange rules (which could, for example, include publishing an
"MTF admission prospectus" as a condition to admitting
securities to trading on AIM in the case of all initial admissions
to trading that allow retail participation). It should be noted
that, unlike the position in admission of securities to a regulated
market, for AIM issuers there would be no specified content for the
MTF admission prospectus and therefore there is currently no
clarity as to what this would look like.
- Offer to the public – One of the main
aims of the reform is to clarify the distinction between
"admission to trading" and "offer to the
public", both of which have historically been triggers for a
prospectus being published. Going forward there would be a general
prohibition on public offers of securities and all public offers
without a prospectus would be unlawful unless they fall into one of
the specified exemptions, some of which are substantially the same
as the existing ones. The current exemption for offers below
€8m would be abolished and replaced with a threshold of
£5m. Going forward, exemptions would include, amongst
- the current 150 person exemption;
- the current "qualified investor" exemption;
- the current exemption allowing an offer of securities whose denomination per unit amounts to at least £50,000;
- the current exemption for offers to existing or former employees or directors;
- a new exemption for offerings of securities which are, or will be, admitted to a UK regulated market or primary multilateral trading facility – this means that such admissions would not automatically trigger a prospectus;
- a new exemption for offerings of securities to existing shareholders, subject to certain conditions including that the offer is made pro-rata to a person's existing holding – this is significant as it means that pre-emptive offers meeting the required conditions would not trigger a prospectus;
- a new exemption for offers made by means of a "regulated platform", which is an electronic offer platform, with the FCA being able to determine detailed requirements to which such platforms would be subject, including the levels of due diligence and disclosure required on offers made through such platforms;
- the current exemption for offers in connection with takeovers; and
- an exemption for offers below a specified threshold, which is still to be determined.
- Liability for a prospectus – In a change to the current position, the new rules would allow the FCA to introduce a new standard of liability for "protected forward-looking statements" which would include statements of opinion or intent, projections and estimates. Such statements would be subject to a recklessness/dishonesty liability standard, with the burden of proof on investors (as opposed to the existing negligence liability standard and reverse burden of proof that may deter issuers from including forward-looking statements in their prospectuses). In other respects, the key elements of the liability regime would remain in place, for example the obligation to pay compensation to investors for loss suffered due to untrue or misleading statements in the prospectus; rights of investors in relation to a misleading prospectus such as a claim for a negligent misstatement.
As always, the devil will be in the detail and the efficiency of the regime will depend heavily on the extent of the new powers given to the FCA and how these will be used.
These reforms comprise "Tranche 1" of the Government's wider programme and commitment to "building smarter financial services framework for the UK" and it expects to make significant progress on this Tranche by the end of 2023.
The FCA is engaging with stakeholders on rules implementing the new regime for public offers and admissions to trading and has published four engagement papers on the key issues as follows:
- Admission to trading on a regulated market – This seeks views on when a prospectus should be required for admission to regulated markets and the relevant exemptions; the required content and format of a prospectus for an IPO; the responsibility for a prospectus; and the approval process.
- Further issuances of equity on regulated markets – This seeks views on whether the FCA should be more ambitious in seeking to reduce requirements for a prospectus for a secondary fundraising as compared to a prospectus for an IPO; whether there should be a percentage threshold for a requirement to publish a prospectus; and what documentation should be required if a prospectus is not required.
- Protected forward-looking statements ("PFLS") – This seeks views on how the new concept of PFLS should be defined; the types of forward-looking statements that should be allowed as PFLS; whether there should be minimum criteria or expectations for how PFLS is produced; whether sustainability-related disclosures should be included as PFLS; and how PFLS should be presented in a prospectus.
- Non-equity securities – This seeks views on how the current UK prospectus regime could be improved in the context of wholesale, debt capital markets.
- Public offer platform – This seeks views on requirements that public offer platforms must meet when performing due diligence on potential offers and their securities; options for the disclosure of information when operating a public offer platform; and the approach to liability under the public offer platform regime.
- Multilateral trading facilities (MTFs) – This seeks views on the circumstances in which MTFs should require the publication of an "MTF admission prospectus"; the contents requirements for an MTF admission prospectus; who should be responsible for such a document; and how and when withdrawal rights should be exercised.
The deadline for responding to the questions raised by the
engagement papers is 29 September 2023 and the FCA is forming
online focus groups to encourage dialogue and feedback. Following
this process, it intends to provide feedback on key points raised
and will then work on developing specific rule proposals for
consultation next year. Further details can be found on the FCA website.
3 Secondary fundraisings
The outcome of the UK Secondary Capital Raising Review (the "Review") was published in July 2022 (please see our client note for further details). Some of the recommended changes have since been implemented, whilst others are still in progress and others still will take more time to be actioned. A summary of the key changes is set out below.
Already actioned: Pre-emption Rights and inclusion of retail shareholders
In November 2022, the Pre-emption Group published a new Statement of Principles and template resolutions (please see our client note for further details). As before, these apply to Main Market companies although AIM companies are also encouraged to comply. The key changes include:
- An increased general disapplication threshold
- The revised Principles increase the limit of the general
authority that can be sought for non-pre-emptive issues to a
maximum of (i) 10% of issued ordinary share capital for
disapplications for any purpose; and (ii) an additional 10% of
issued ordinary share capital for acquisitions or specified capital
investments announced contemporaneously with the issue or in the
last 12 months (increased from six months). The revised thresholds
reintroduce, on permanent basis, the temporary flexibility granted
to companies during the COVID pandemic;
- Consideration of retail investors - In order
to give due consideration to whether retail investors (and existing
investors who are not allocated shares) should be able to take part
in the placing, there is a new concept of a "follow-on
offer", which can be a further 2% in relation to each limb on
the basis that it is:
- limited to 20% of the number of shares issued in the placing using the 10% general disapplication;
- capped at a £30,000 purchase per ultimate beneficial owner;
- at an issue price which is equal to or less than the offer in the placing; and
- announced at the same time as, or as soon as reasonably practicable after, the announcement of the placing.
- Concept of "capital hungry
companies" (i.e. companies that need to raise larger
amounts of capital more frequently) – Such companies will be
granted more flexibility in terms of the duration and thresholds of
the disapplication of pre-emption rights. The new concept aims to
attract high-growth companies in sectors such as tech and life
- Reporting requirements – A
post-transaction report must be announced via a regulatory
information service, as well as being submitted to the Pre-Emption
Group for inclusion in its Pre-Emption Database. This information
should also be included in the company's annual report
following the issue.
- Curtailment of status of cashbox structures – A cashbox structure should be regarded as an issue of equity securities for cash and is therefore subject to the disapplication limits.
Already actioned: Expanding scope of rights issue authority to open offers
In February 2023, the Investment Association published a revised version of its Share Capital Management Guidelines (last updated in 2016). Whilst the Investment Association still regards as routine an authority to allot up to two-thirds of a company's existing issued share capital, it extends, as recommended by the Review, the application of the second one-third to all fully pre-emptive offers, not just rights issues as was previously the case. However, companies are expected to explain why they have chosen their capital raising structure and why it is appropriate for the company and its shareholders.
Still to come: Reducing regulatory involvement and cost
The remaining recommendations within this section will take more time, as many are dependent on (i) legislative changes and (ii) the outcome of the other changes taking place in relation to the listing and prospectus regimes, as described in this note. Examples of such changes are:
- raising the dilution threshold for a prospectus - The Review recommended that the threshold for a prospectus should be raised from the current 20% to 75% of an issuer's existing share capital. However, the FCA notes in one of its recent engagement papers that, although the scale of the issuance is an important driver in whether prospectus requirements are proportionate for further issuances, it may be difficult to establish an optimum level of share capital threshold based on a quantitative analysis only and other factors may be assessed, such as the purpose of the fundraising;
- removing the need for a sponsor;
- changes to the FCA's approach to working capital; and
- shortening the rights issue timetable (both the minimum period for rights issue and the minimum notice period for general meeting).
Still to come: Increasing range of fundraising options
Increasing the range of options is also more of a long-term goal. Options being looked at include:
- the concept of a cleansing notice; and
- a set of standard form terms and conditions with institutional
Forthcoming changes in the EU
Although the forthcoming changes to the UK listing and prospectus regimes represent a departure from the EU-based regime, the EU listing and prospectus regimes are also likely to be changing. The EU proposals published at the end of last year are aimed at attracting more companies to list on EU public markets and include amending the EU Prospectus Regulation and EU MAR to reduce regulatory and compliance costs for companies seeking to list and those already listed. It should be noted that the Commission's legislative initiative still has to pass the legislative process and its therefore uncertain if and when the proposed changes would take effect. If passed, the changes would include:
- changes to the prospectus exemptions, including raising the
exemption for secondary issuances from 20% to 40% and extending
this to offers to the public;
- a new follow-on prospectus replacing the current simplified
disclosure regime for secondary issues and the EU Recovery
- a new EU Growth issuance document to replace the current EU
- raising the threshold of the optional exemption whereby member
states can choose to exempt offers of securities to the public from
the obligation to produce a prospectus from the current EUR 8
million to EUR 12 million (this figure representing the total
consideration of each such offer in the EU), with member states
being allowed to require national disclosure documents for public
offerings which fall below this threshold; and
- shortening the offer period for an IPO from six days to three days.
Originally published 16 May 2023
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